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I have read the importance of saving early and the power of compound interest many many times. However I am a Muslim and cannot participate in anything involving interest. I also learned that keeping money in terms of just cash is the worst form since there is inflation etc. I would like to know what can I do to become rich. Please suggest. Thanks.

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    Fahad, I'm pretty sure you're mixing-up making a loan (so, you can't loan money to me) with the fact that some investments will make you money. (So: you buy something for $100. Later you sell it for $150. You've made $50 or 50% profit.) Both those concepts use the term "interest" but they are totally unrelated, fortunately! It's admirable to not want to be involved in ursury; but it's totally OK to "make money from an investment". – Fattie Oct 31 '16 at 11:28
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    I'm voting to close this question as off-topic because the core question is about Islamic law. – Pete B. Oct 31 '16 at 11:44
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    Hmm, he's asking for alternatives to collecting interest within the confines of Muslim ethical rules. Is it really a rule on this board that ethics must be ignored? I've seen questions about environmentally-conscious investing, investing that avoids supporting military contractors, etc. Are those also out of bounds? Is any answer that does not consider the possibility of achieving your goals by stealing or murder out of bounds? Many ethical issues brought up here are not universally acknowledged. – Jay Oct 31 '16 at 13:23
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    Arbitrary limitations on otherwise sound financial planning should be reserved for the domain-specific site, where a variation on this has already been asked. Why is this still open? – Lilienthal Oct 31 '16 at 17:00
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    If you get interest on a savings account, you are loaning to a bank. If you get interest on government bonds, you are loaning to the government. If you buy stocks, you are participating in the corporations borrowing and loaning. Where to draw the line should indeed be asked elsewhere, probably in the islam group.. – WGroleau Oct 31 '16 at 19:46
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There are many Shariah compliant investments, so that could direct your resulting searches. Shariah compliance is a very strict interpretation of Islam and for investing offers strict guidelines in what to invest in and excludes investments in companies that engage in certain businesses such as gambling, tobacco, pork and trading of gold and silver on a deferred basis (and more). Many multinational financial service companies such as the Standard & Poors (S&P) offer Shariah Compliant funds and indices, as such, it makes it easier to invest in a variety of different assets through them. You can also look at their fund's constituents and invest in those assets directly.

Secondly, going back to your original question about a compound interest equivalent, you can look at the products offered by Shariah Compliant banks.

Now, if it is really important for you to adhere to the strictest interpretations of your faith, you should know that most Islamic Banks have interest bearing assets within them and that they disguise that fact. The global financial system is based on interest bearing instruments such as bonds, and Islamic banks are large holders and issuers of those instruments, and all of their consumer products are also based on the interest rates of them. Even convoluted alternatives such as Islamic mortgages, where they are advertised as non-interest bearing equivalents, many times are also the interest bearing version. Unfortunately, these lies are enough for the banks to continue to get business from their target audiences, but outside of Islam this is a very standard and stable business practice.

The point is that you should look very carefully at the alternatives you find.

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    I would VTC the question, but this answer makes it a viable question for this site! +1 – Anoplexian Oct 31 '16 at 17:30
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    @Anoplexian That's not how Stack Exchange works. An answer cannot redeem a question, and a question is always (and by is always, I obviously mean should always be) judged open or closed based solely on the question itself. – corsiKa Nov 1 '16 at 5:03
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    @corsiKa: I would say that in this case Anoplexian originally misjudged the question, thinking that it was somehow bad. However, something in this answer provoked a better assessment. Specifically Pete B's comment says that the question is about Islamic law, which people might agree with if they don't realise (as this answer makes clear) that it is not about Islamic law as such, it's about Islamic finance. So yes, answers can change people's assessments of questions, and there is no duty to ignore information gained from answers when assessing questions. – Steve Jessop Nov 1 '16 at 12:47
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    Similarly, there are a lot of questions here that someone might mistakenly think are off-topic since they're about US tax law. But even someone who initially judges the question that way, once they see an answer talking about the practical tax considerations, will realise that it is indeed about personal finance, despite the fact that it's the law driving the financial considerations. So on a first read, money.stackexchange.com/questions/26957 might appear to be a legal question seeking a legal opinion, but really it isn't. – Steve Jessop Nov 1 '16 at 12:52
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    @SteveJessop i.imgur.com/y1G5HiG.png – corsiKa Nov 1 '16 at 14:43
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My understanding of Muslim finance is that you may not lend money at interest, including investing in in things that pay interest. However you may still make investments: it just has to be in places where you get a share of profit, rather than a fixed rate of return. You would be better asking the Muslim community specifically for more details.

The benefits of compound interest apply, more or less, to other non-fixed-interest investments. If you invest $1000 in a business and get a 10% rate of return, you have $1100 to invest in your next venture, which means it will be more profitable and so on. That's why the growth happens, not specifically because it is interest. Stocks do not pay interest, and the 'magic' applies to them too. The fact that you might lose as well as win complicates things, but doesn't change the principle.

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    "My understanding of Muslim finance" And here's why this is such an off-topic question here. What do you actually know of the restrictions placed on interest in Islam? Or the extent to which different paths of the faith apply those restrictions? – Lilienthal Oct 31 '16 at 17:08
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    @Lilienthal why should this question be treated differently than any other topic which requires research? IMO that actually improves the quality of the answer and the novelty of the post in general. – user22731 Oct 31 '16 at 21:55
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    @Lilienthal: The fact that a given answerer doesn't know the details of what he's talking about has nothing to do with whether the question is on topic. – BrenBarn Nov 1 '16 at 3:56
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    @Lilienthal You do actually say, in your comments on this answer, that this answer is the reason why the question is off topic. I would contend that whatever you think of the quality of my answer, it has no bearing on whether the question is on topic or not. – DJClayworth Nov 1 '16 at 17:03
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    @Lilienthal The question isn't asking "What are the restrictions on investing in Islam", it's "Given that I have restrictions on investing due to Islam, what financial measures can I take to get the 'magic of compound interest'". My answer is saying "if the restrictions due to Islam are what I believe they are, here is how you can achieve the 'magic of compound interest'". Which is all about finance, and not about Islam. – DJClayworth Nov 1 '16 at 23:41
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I cannot tell you what is or is not allowed under Islamic law. What I can tell you is that when most investors talk about the "power of compound interest," they are not actually necessarily talking about interest!

The idea of the magic of compound interest is that when you receive an interest payment on your investment, you now have a larger investment, earning more interest. Your investment grows exponentially. This doesn't just apply to interest payments, however, but can apply to any type of investment where the profits of the investment cause the investment to get larger.

For example, if you invest in a company's stock, and the value of the stock goes up 10% in a year, after that year your investment is worth more than it was at the beginning. If it goes up another 10% the following year, you have gained more money in the second year than you did in the first. Your gains are compounding, even though interest payments are not involved at all. The same is true if you reinvest dividends or if you use business profit to expand your business, for example. The term "power of compound interest" is so named for historical reasons, but really applies to any type of investment where the investment itself is growing.

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    Yes, if the value of the stock goes up, the investment is worth more but the stockholder has not gained any money in the sense of cash flow: there is no income from the investment (not even income that is rolled back into more shares of the stock) until such time as it is sold. – Dilip Sarwate Oct 31 '16 at 14:37
  • @DilipSarwate That is true. However, we often discuss investments in terms of annual percentage growth rate. If your investment grows by a certain percentage each year (not guaranteed), then your investment is growing in value exponentially, increasing each year in value by more than the previous year's increase. – Ben Miller Oct 31 '16 at 14:46
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    @Lilienthal The premise of the question is flawed, because it assumes that someone that refuses to invest in interest-bearing investments cannot take advantage of the power of compound interest. By pointing out that you can indeed take advantage of the so-called power of compound interest even while not collecting interest, I believe that I have answered this question in a perfectly reasonable way. – Ben Miller Oct 31 '16 at 17:11
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    @BenMiller The premise is flawed because this question doesn't belong on this site which in turn should mean that experienced users here don't answer it. If you want to say that other investment returns beside interests can be said to compound then that's arguably more of a comment than an answer to this question. – Lilienthal Oct 31 '16 at 17:25
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    @Lilienthal I personally think this question is on-topic. It is about personal finance and it is about investing. – Ben Miller Oct 31 '16 at 17:27
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Invest in growth stocks which do not pay any dividends (Note that some part of the dividends issued by a corporation might be from interest received by the company and passed on to you as a dividend);

Buy a house from a bank that practices Islamic Banking. See this question which you yourself answered a few weeks ago to understand how this works.

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    I believe that stock dividends are also not considered interest, though I may be wrong. – DJClayworth Oct 31 '16 at 3:23
  • @DJClayworth Note that the answer specifies why dividens is problematic - it's not that dividens on their own are bad; they are just a share of the profit, it's that you don't have control over how the company earns it's profit - some of which might be from interest. – Taemyr Oct 31 '16 at 11:14
  • This can get extremely complicated as your due diligence would require making sure that none of the companies you invest in own any bonds or other interest bearing instruments. – Myles Oct 31 '16 at 14:54
  • @Myles Yes indeed; it all depends on the degree of strictness with which the canons of the faith are interpreted. – Dilip Sarwate Oct 31 '16 at 15:15
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Because so many businesses make some money through some form of compound interest, like a business that saves its earnings in a business account that pays interest, it heavily depends on how strict you interpret this law. Some Muslims I know interpret it to mean directly and indirectly, while for some it's just direct interest earned.

What I would suggest is either a direct investment in agriculture or a share in agriculture, where you are directly paid from your share in the investment and not through money that comes from a bank account earning interest. If you do a direct investment in agriculture, like owning livestock, you will be paid money in the form of food, which compounds through reproduction and can sell the offspring to others and collect the money. Year to date, agriculture is crushing the S&P 500 and many places around the world are facing shortages in food, like sugar and corn.

If you don't have enough money for a direct investment, you can try the share route where you own a share of a direct investment. Rather than go through stock exchanges, where many of these companies make money indirectly through interest also, you can negotiate directly with farmers, ranchers, livestock owners, etc. Some of these individuals are looking to diversify their money, so they may be willing to let you own a fraction of what they produce and pay you directly.

All of this comes with risk, of course. Livestock and plants die for a variety of reasons, but none of it will be interest from lending whether to individuals or through a bank. In addition, if we experience very high inflation in the future, livestock and plants do very well in this environment.

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In the UK at least, we have Credit Unions. Credit Unions are not-for-profit organisations that don't pay interest on your balance, but instead give you a share of their profits at the end of the year (or at least my local branch do). This normally equates to around 1% of my balance.

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I am not sure if these are available today in your country: but supposedly, back when Catholic countries similarly forbade usury, sinecures were invented to circumvent religious restrictions on finance. Meaning literally 'without care', sinecures were formally prestigious salary-paying jobs with few responsibilities. They were bought by the wealthy from the Church or State. The salaries for sinecures, accumulated over time, exceeded the initial purchase price. As such, some moderns consider sinecures usury in all but name.

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There are lot of options. I personally avoid keeping money in bank accounts and invest in one of the funds.

It's just my personal opinion, you can ask your Ulamas

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It depends whether you want to be technically compliant with the letter of the law or compliant with the underlying meaning. For instance, in some countries you can find shell companies that do nothing but deal in fixed income instruments (those that you want to avoid) and dividend stocks (those that you might or might not be allowed to use). You can buy stock of that shell company, which does not hand out dividends itself. Thereby, you transform interest and dividends into capital gains.

These shell companies exist for fiscal reasons, the more risky capital gains are often less taxed than interest or dividends. This might technically solve your problem, but not really change anything in the underlying reality.

P.S. Don't worry too much about missing compounding interest. The rates are incredibly low right now.

protected by Ganesh Sittampalam Nov 3 '16 at 15:50

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